What an SBA 7(a) Covers and What It Does Not

SBA 7(a) is the most flexible of the SBA loan programs, covering a wide range of small business financing needs including commercial real estate, equipment, working capital, business acquisition, and debt refinancing. For Macomb County small businesses considering SBA financing, understanding what 7(a) covers and what it does not helps determine whether 7(a) fits the specific need better than 504 or conventional financing.

What 7(a) covers on real estate. Owner occupied commercial real estate purchases where the business will occupy at least 51 percent of an existing building or 60 percent of new construction. Building improvements and expansions on owner occupied property. Refinancing of existing commercial real estate debt under specific conditions. The real estate portion of a 7(a) loan can run up to 25 years amortization, longer than most conventional commercial loans.

What 7(a) covers beyond real estate. Working capital for business operations up to $5 million total loan size. Equipment purchases with amortization matching equipment useful life. Business acquisition where a small business owner buys another business including real estate, equipment, inventory, and goodwill. Franchise financing for approved franchise systems. Debt refinancing that consolidates business debt into more favorable terms.

Loan size limits. Maximum 7(a) loan size runs $5 million total. The SBA guaranteed portion caps at 75 percent for loans above $150,000, meaning the SBA guarantees 75 cents of every dollar the lender is at risk for. Smaller loans get higher guarantee percentages up to 85 percent. The guarantee protects the lender, letting them lend more aggressively than they would with pure conventional risk exposure.

Down payment requirements. 7(a) real estate loans typically require 10 to 15 percent down for existing buildings and 15 to 20 percent down for new construction. Working capital components sometimes require no down payment. Business acquisitions require 10 percent down from buyer equity plus possibly seller financing on the balance. The overall leverage on 7(a) exceeds most conventional commercial financing.

Rate structure. 7(a) rates are variable rather than fixed, typically pegged to Prime rate plus a spread of 2.25 to 4.75 percent depending on loan size and term. Rate resets happen quarterly on most loans. At current Prime rates around 7 to 8 percent, 7(a) rates run 9 to 12 percent depending on the specific spread. Fixed rate 7(a) is available in some situations at higher pricing.

Fees and costs. SBA charges guarantee fees on 7(a) loans, running from 0.55 percent to 3.75 percent of the guaranteed amount depending on loan size and term. Guarantee fees can be financed into the loan. Standard commercial loan closing costs also apply including title insurance, appraisal, environmental, and legal. Michigan attorney close requirements add attorney fees on both sides. Total upfront costs on typical Macomb County 7(a) transactions run 3 to 5 percent of loan amount.

What 7(a) does not cover. Investment real estate that will not be owner occupied. Real estate held for passive rental income. Speculative businesses. Businesses with certain SBA excluded activities. Businesses that do not meet SBA size standards for small business. Businesses owned by individuals with recent bankruptcy or certain criminal history. The 51 percent owner occupancy requirement is strict and does not allow 7(a) for buildings where the business will not fully occupy the required threshold.

7(a) versus 504 comparison. 504 offers fixed rate long term financing on the CDC portion, which 7(a) does not typically match. 504 requires only 10 percent down for owner users, similar to 7(a). 504 works for real estate and heavy equipment but does not cover working capital, business acquisition, or general business needs. 7(a) is more flexible on use of proceeds but comes with variable rates and different fee structures. Small businesses buying buildings only usually prefer 504. Small businesses combining building with working capital needs often prefer 7(a).

Personal guarantees. All principals owning 20 percent or more of the borrowing business must personally guarantee 7(a) loans. SBA does not allow non recourse structures. The personal guarantee remains in place for the life of the loan in most cases and survives most business restructurings.

TDG Commercial, known as top commercial realtors in Macomb County, works with SBA lenders across Michigan to structure 7(a) transactions for small business clients.